PILLAR3 OF THE BASEL FOR THE YEAR ENDED 31 DECEMBER 2016 CONTENTS INTRODUCTION... 2 REPRESENTATION REGARDING SUITABILITY OF RISK MANAGEMENT MEASURES... 2 CONDENSED RISK REPORT... 2 ORGANIZATIONAL STRUCTURE... 2 OPERATING RISK MANAGEMENT AND INTERNAL CONTROL... 4 Internal control... 4 Operational risk management... 4 CAPITAL MANAGEMENT... 6 Minimum capital requirements for the Bank and the Financial Group... 6 Capital adequacy... 7 Countercyclical capital buffer calculation... 7 Geographical distribution of credit risk exposures for countercyclical buffer calculation... 8 Specifications for risk-weighted exposures and capital requirement... 8 Geographical distribution of exposures... 9 Exposure by business type... 10 Leverage ratio... 10 ECAI used... 11 Credit risk and effect of its mitigation... 11 Exposures after application of credit risk mitigation procedures following each credit quality step... 12 Internal capital adequacy assessment process (ICAAP)... 12 ANNEX 1 CAPITAL INSTRUMENTS' MAIN FEATURES TEMPLATE... 14 ANNEX 2 OWN FUNDS DISCLOSURE TEMPLATE... 15 ANNEX 3 CRR LEVERAGE RATIO DISCLOSURE TEMPLATE... 18 ANNEX 4 DISCLOSURE ON ASSET ENCUMBRANCE... 21
INTRODUCTION Hereby we provide additional unaudited information following the chapter eight of Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms. Information on risk, its management and capital of Šiaulių Bankas AB (hereinafter referred to as the Bank) is disclosed in the annual report of the Bank. This document includes additional information published together with the annual financial report. The document contains the information on the Bank's own funds, internal capital ratios, key properties of the capital measures, provides justification of the risk management suitability and determines of the overall risk profile of the organization according to its business strategy. REPRESENTATION REGARDING SUITABILITY OF RISK MANAGEMENT MEASURES The risk management systems applicable by Šiaulių Bankas AB are appropriate taking into account the size, nature of activities and strategy of the Bank and its subsidiaries (the Group - together with the Bank). This representation was approved by the Management Board of the Bank on 21 March 2016 and signed by the Chief Executive Officer on behalf of the Management Board. Chief Executive Officer Vytautas Sinius CONDENSED RISK REPORT The condensed risk report is included in the consolidated annual report (see chapter 11, page 122). ORGANIZATIONAL STRUCTURE Šiaulių Bankas AB is registered as a limited liability public company in the Register of Legal Entities of the Republic of Lithuania on 04 February 1992. The Bank has a licence issued by the Bank of Lithuania to perform all banking operations specified in the Law on Banks of the Republic of Lithuania and in the Charter of the Bank. 2/22
Figure 1 Šiaulių Bankas's Group structure Organizational management structure, management bodies, structure and functions of the committees, etc. are disclosed in the Consolidated Annual Report for 2016: composition of the management bodies and principles of nomination of their members as well as information on competences of each member of the management body and positions held are disclosed in chapter 26 and 27 (pg. 143-150) of the Consolidated Annual Report for 2016; structure functions and composition of the committees are disclosed in chapter 25 (pg. 141-142) of the Consolidated Annual Report for 2016. As a socially responsible employer, the Bank is guided by the principles of equality and diversity, it provides equal career opportunities without taking into account people's age, gender, ethnicity, religion and etc. (data on the Bank's employees are disclosed chapter 23 (pg. 134-136) of the Consolidated Annual Report for 2016. The document discloses either separate or consolidated information as of 31 December 2016. Two following key levels of consolidation shall apply the Bank, separately. the Financial Group which includes the Bank and its subsidiary companies: SB Lizingas UAB (nature of activities: finance lease, consumer credits), Šiaulių Banko Lizingas UAB (nature of activities: finance leases (leasing) and operating lease services), Šiaulių Banko Investicijų Valdymas UAB (nature of activities: investment management), and Šiaulių Banko Turto Fondas UAB (nature of activities: real estate management). Group which includes the Bank and its directly controlled subsidiaries: SB Lizingas UAB, Šiaulių Banko Lizingas UAB, Šiaulių Banko Investicijų Valdymas UAB, Šiaulių Banko Turto Fondas UAB SBTF UAB (nature of activities: management and administration of real estate), Minera UAB (nature of activities: real estate management), Pavasaris UAB (nature of activities: development of residential apartment area), life insurance Bonum Publicum UAB (nature of activities: life insurance), and indirectly controlled following subsidiaries: Sandworks UAB (nature of activities: real estate management) and Apželdinimas UAB (nature of activities: real estate management). 3/22
OPERATING RISK MANAGEMENT AND INTERNAL CONTROL Risk management and internal control are two critical systems the proper functioning of which ensure the sustainable and successful Bank's performance. Internal control The Bank s internal control system is an integral and continuous process in day-to-day activities at the Bank arranged applying the three lines of defence approach. At the appropriate level each employee of the Bank is responsible of the Bank's internal control system processes and each employee is involved in the internal control system and may affect it. The Internal control is a complex process implemented by the management and personnel and intended to identify risk factors as well as to ensure that the following general objectives are met: a transparent, cost-efficient and effective implementation of the activities; fulfilment of payment obligations; compliance with applicable laws and regulatory acts; protection of resources against loss, misuse and damage. Operational risk management The Group accepts, manages, analyses, and evaluates the risks arising from its activities. The purpose of risk management in the Group is to ensure the sufficient return on equity by managing risks in a conservative manner implementing the advanced risk management policy the Bank seeks not only to minimize the potential risks at maximum but also to ensure the optimal risk to profit ratio as well as the efficient allocation of the capital. The risks faced by the Bank are managed efficiently following the requirements set by the European Union, the Bank of Lithuania and the Policy of Risk Management in Banking Activities approved by the Supervisory Council of the Bank. Creation of an appropriate risk management system, its on-going improvement and application of its measures in daily activities are one of the key assumptions ensuring the successful performance of the Bank in the long-term run. Risk management is a structured, coordinated and continuous process taking place at all levels within the Bank and encompassing the following objectives: to harmonize business strategy and risk tolerance; to seek solutions for responding to risk; to reduce operating losses; to increase business opportunities; to identify the many overlapping risks, for separate or integrated assessment; to improve capital allocation. The risks are assessed from bottom to top and from top to bottom throughout the entire management chain, in all activity lines within the Bank and its Group applying a consistent terminology and appropriate approaches. Seeking to avoid the conflict of interest, the Bank s units performing the risk management functions are separated from the units, the direct performance of which are related to the emergence of various types of the banking activity risks. 4/22
The Bank's risk management system consists of the following items: risk management strategy; remuneration policies that are consistent with and promote sound and effective risk management; identification of the significant risk types and development of their management measures; internal risk management control the key principles of which are set out in the Guidelines for Internal Control Arrangement; internal audit assessing efficiency of the risk management processes on regular basis. Remuneration Policy. The Bank's Remuneration policy in and integral part of the risk management system. The Remuneration policy is consistent with the Bank's strategy, risk appetite, the Bank's objectives, values and long-term vision. It does not have to contradict the principles of risk management and has to discourage the Bank's employees from unreasonable risk-taking. The success of the Remuneration policy lies in compliance of the employees' personal interests with the long-term goals of the Bank. The role of employee groups and their functions differ, therefore, they are subject to different principles and forms of remuneration. The Remuneration policy is reviewed on regular basis and approved by the Bank's Supervisory Council as it is foreseen by the valid Remuneration Policy. The Remuneration policy is mainly implemented by the Management Board of the Bank. ICAAP. One of the major absorbers of the likely loss is a strong capital base, therefore the Bank seeks to have an adequate capital reserve which would cover the assumed level of risks. Thorough and comprehensive internal capital adequacy assessment process (ICAAP) is a vital part of the risk management policy. The purpose of the Bank's ICAAP is to implement processes ensuring the calculation and accumulation of a capital base sufficient to cover the nature and level of the risks that arise or might arise from banking activities and to ensure business continuity. ICAAP includes the Bank's self-assessment, stress testing and establishment of the internal capital requirement. During the internal self-assessment the risk characteristics to the Bank's activities are identified and evaluated using chosen methods of assessment. The impact of the risk on the Bank's income and capital is assessed to determine the level of risk. The main goal of stress testing is to determine whether the Bank s capital is sufficient to cover the possible losses that could be provoked by a deterioration of the Bank s financial situation. Additional capital requirement for risks identified as significant during the self-assessment process is determined periodically using stress testing and evaluation of the internal capital adequacy. Risk appetite. Risk appetite is an integral part of the efficient risk management system indicating the amount and type of risk that the Bank is willing to take in order to meet its strategic objectives. Risk appetite determines the allocation of resources, optimization of the management structure and business processes and is of a significant priority identifying operational objectives. Arrangement, coordination and control of the risks faced by the Bank and assurance of the risk level matching the risk tolerance/appetite acceptable to the Bank are the main objectives of the Bank s Risk Management Committee. Strategic risk management issues are tackled by the Risk 5/22
Committee consisting of the members of the Supervisory Council. The functions and composition of the Risk Management Committee are provided for in chapter 25 of the Consolidated Annual Report for 2016 (pg. 141 of the Annual Financial Statements 2016). CAPITAL MANAGEMENT The Bank's and the financial group's capital is calculated and allocated to risks following the requirements laid down in the Capital Requirements Directive (CRD) EU and Capital Requirements Regulation (CRR) EU No 575/2013. The capital management aims to: 1) to comply with capital adequacy requirements laid down by the European Parliament and the Council as well as with the higher targeted capital adequacy requirements set by the single shareholder; 2) to ensure continuity of the Bank's and the Group's business, returns for shareholders and profits for other interested parties; 3) to stimulate the Group's business development based on the strong capital base. Following the requirements set forth in CRR/CRD IV information on capital adequacy is delivered to the supervisory authority on quarterly basis. Minimum capital requirements for the Bank and the Financial Group Common equity tier 1 capital (CET1) Tier 1 capital (CET1) Tier 2 capital Own funds requirements in total Pillar 1 Minimum own funds requirements 4.5 1.5 2.0 8.0 Capital conservation buffer 2.5 2.5 Other systematically important institution's buffer (O- 0.5 0.5 SII) 1 Institution's special countercyclical capital buffer 2 0.0 0.0 Capital adequacy ratio 7.5 1.5 2.0 11.0 Pillar 2 3 adjustments due to interest-rate risk in banking book 0.3 adjustments due to concentration risk in banking book 1.6 Additional capital adequacy coefficient 1.9 0.0 0.0 1.9 Minimal own funds requirement 9.4 1.5 2.0 12.9 1 On 17 December 2015 the Bank of Lithuania established the other systemically important institutions' buffer (O-SII) of 0.5 per cent from the total risk weighted exposure amount. The capital buffer must be accumulated before 31 December 2016. 2 The Bank of Lithuania has defined that since 31 December 2016, a countercyclical capital buffer rate applicable in the Republic of Lithuania shall be equal to 0 per cent from the risk weighted exposure amounts used for buffer calculations. 3 Additional requirements of Pillar 2 are laid down pursuant to data provided for in the SREP report as of 30 June 2016. 6/22
Capital adequacy Eur thousand THE BANK FINANCIAL GROUP GROUP Common equity tier 1 capital instruments eligible as common equity tier 1 capital Paid up capital 109 472 109 472 109 472 Share premium - - - Previous years retained earnings 16 604 20 105 21 155 Independently verified interim profit minus any foreseeable taxes or dividends 27 176 25 724 24 811 Other reserves 756 756 756 Provisions for general banking risk 4 157 4 157 4 157 Part of financial assets revaluation reserve 166 187 187 (-) Goodwill - (14) (2 752) (-) Intangible assets (1 210) (1 361) (1 428) (-) Deferred tax assets that rely on future profitability - (87) (87) (-) Value adjustments due to requirements for prudent valuation (52) (54) (67) (-) Expenses for provisions for financial assets (7 535) (7 024) (3 470) TIER 1 CAPITAL 149 534 151 861 152 734 Capital instruments and subordinated loans eligible as Tier 2 Capital: Subordinated loan capital 20 000 20 000 20 000 Part of financial assets revaluation reserve 111 124 124 TIER 2 CAPITAL 20 111 20 124 20 124 OWN FUNDS 169 645 171 985 172 858 Own funds requirement: Risk weighted exposure amount for credit risk under the Standardized Approach 872 393 860 131 839 425 Traded debt instruments 20 928 20 928 30 924 Equity securities 890 890 890 Foreign exchange exposures - - - Operational risk under the Basic Indicator Approach 110 372 118 005 143 577 Other capital requirements (credit value adjustment risk) 63 63 63 Total risk exposure amount 1 004 647 1 000 018 1 014 879 CET1 Capital ratio (9.4 %) 14.88% 15.19% 15.05% T1 Capital ratio (10.9%) 14.88% 15.19% 15.05% Total capital ratio (12.9%) 16.89% 17.20% 17.03% Countercyclical capital buffer calculation Country Total amount of own funds requirements, Eur thousand Countercyclical capital buffer rate Countercyclical capital buffer rate of the institution Countercyclical capital requirement Lithuania 66 704 0.00 per cent 0.00 per cent - 7/22
Geographical distribution of credit risk exposures for countercyclical buffer calculation Country Part of respective exposures Buffer rate by country Lithuania 94.4% 0.0% Ireland 0.1% 0.0% Austria 0.1% 0.0% Belgium 0.0% 0.0% The Czech Republic 0.1% 0.5% Chile 0.2% 0.0% Denmark 0.3% 0.0% the United Kingdom 0.6% 0.0% Italy 0.6% 0.0% USA 1.1% 0.0% Latvia 0.0% 0.0% Malaysia 0.1% 0.0% Mexico 0.3% 0.0% Norway 0.0% 1.5% Netherlands 0.3% 0.0% France 0.8% 0.0% Finland 0.3% 0.0% Sweden 0.1% 1.5% Switzerland 0.1% 0.0% Germany 0.4% 0.0% Turkey 0.1% 0.0% Countercyclical capital buffer of the 100.0% 0.0% institution Specifications for risk-weighted exposures and capital requirement The risk-weighted assets are measured under a standardized approach using risk weights classified according to the nature of each asset and counterpart, taking into account collaterals and guarantees eligible for risk mitigation. A similar treatment with some adjustments is adopted for the off-balance sheet exposures. Capital requirements for operational risk are calculated using the Basic Indicator Approach. 8/22
The Bank Financial group Eur thousand Own funds Exposure by risk Own funds requirement Exposure by risk requirement Credit risk 872 393 69 791 860 131 68 811 Central governments or central banks' exposures 1 838 147 1 838 147 Regional governments or local authorities' exposures - - 10 1 Public sector entities' exposures 24 184 1 935 24 242 1 939 Multilateral development banks' exposures - - - - Institutions' exposures 42 284 3 383 43 563 3 485 Corporates 328 022 26 242 261 290 20 903 of which subject to SME 85 772 6 862 85 424 6 834 Retail 95 452 7 636 136 905 10 952 of which subject to SME 66 892 5 351 70 666 5 653 Secured by mortgages on real estate 226 549 18 124 226 549 18 124 of which subject to SME 36 395 2 912 36 395 2 912 Exposures in default 16 577 1 326 23 470 1 878 of which subject to SME 3 931 314 3 931 314 Exposures associated with particular high risk 73 436 5 875 73 436 5 875 of which subject to SME 4 461 357 4 461 357 Collective investment entities' exposures (CIE) 2 970 238 3 910 313 Equity securities exposures 40 030 3 202 28 415 2 273 Other exposures 21 052 1 684 36 504 2 920 Exposure to market risks 21 818 1 745 21 818 1 745 Traded financial instruments 20 928 1 674 20 928 1 674 Equity securities 890 71 890 71 Foreign exchange position - - - - Operational risk 110 372 8 830 118 005 9 440 Credit assessment adjustment 63 5 63 5 Total amount 1 004 647 80 372 1 000 018 80 001 Geographical distribution of exposures Eur thousand the United Lithuania Ireland Bulgaria Kingdom Spain Italy USA Poland Other In total Central governments or central banks' exposures 423 268 4 005 10 071-7 935 7 491-21 667 34 942 509 379 Regional governments or local authorities' exposures 113 821 - - - - - - - - 113 821 Public sector entities' exposures 75 389 - - - - - - - 9 769 85 158 Multilateral development banks' exposures 0 - - - - - - - 2 027 2 027 Institutions' exposures 21 660-35 6 800 1 070-11 945 239 59 890 101 639 Corporates 333 470 - - 681-4 308 9 133-36 687 384 279 Retail exposures 191 257 - - - - - - - 519 191 776 Secured by mortgages on real estate 418 607 - - 46 - - - - 15 418 668 Exposures in default 19 327 - - - - 15 - - 1 19 343 Exposures associated with particular high risk 48 957 - - - - - - - - 48 957 Collective investment entities' exposures 2 885 - - - - - - - 85 2 970 Equity securities exposures 26 977 - - - - - 430-24 27 431 Other exposures 46 220 - - 3 412 - - 135-351 50 118 In total 1 721 837 4 005 10 106 10 939 9 005 11 814 21 643 21 906 144 311 1 955 566 9/22
Eur thousand Exposure by business type Agriculture, forestry and fishing Processin Constructions g industry Whole sail and retail trade Financial and insurance activities Real estate activities Public management and defence Other Private persons In total Central governments or central banks' exposures - - - - 509 379 - - - - 509 379 Regional governments or local authorities' exposures - - - - - - 113 821 - - 113 821 Public sector entities' exposures - - 42 - - - 29 999 55 117 85 158 Multilateral development banks' exposures - - - - 2 027 - - - - 2 027 Institutions' exposures - - - - 101 639 - - - - 101 639 Corporates 35 071 44 779 35 656 65 832 60 029 27 623-115 289-384 279 Retail exposures 55 789 16 056 11 537 29 955 3 106 4 318 331 34 126 36 558 191 776 Secured by mortgages on real estate 25 361 56 199 28 246 85 095 1 387 95 963 300 92 678 33 439 418 668 Exposures in default 2 098 3 734 2 100 2 486 286 80-6 239 2 320 19 343 Exposures associated with particular high risk - - 42 039 - - 6 918 - - - 48 957 Collective investment entities' exposures - - - - 2 970 - - - - 2 970 Equity securities exposures - - 6 457-18 075 2 577-322 - 27 431 Other exposures - - - - - - - 50 118-50 118 Memo item: specific provisions for the impairment of financial assets (896) (8 973) (8 630) (5 106) (21) (3 090) - (2 915) (2 034) (31 665) In total 118 319 120 768 126 077 183 368 698 898 137 479 144 451 353 889 72 317 1 955 566 Leverage ratio Both the common equity changes as well as changes in the exposure amount used to calculate the leverage ratio had a significant impact on the leverage ratio in 2016. Recognition of H2 2015 profit in retained earnings and inclusion of H1 2016 profit had the largest impact on the common equity, the exposure amount used in calculating the leverage ratio increased mainly due to increased asset exposures. Both the numerator and the denominator changes led to the leverage ratio growth from 7.16 per cent to 8.03 per cent. 10/22
ECAI used Assessing exposures subject to external credit rating, the Bank uses the following well-known external credit assessment institutions (ECAI): Standarts&Poor s Moody s Investors Service Fitch Ratings Exposures of debt securities and institutions are subject to the external credit rating which, assessing the credit risk under the standardized method, are classified according to the issuer, issue or rating held by the institution itself. If an individual exposure has been rated by two assessment institutions then less the favourable assessment shall apply, in case three ratings are provided - two most favourable shall apply, in case two most favourable ratings do not coincide - then less favourable shall apply. Credit risk and effect of its mitigation Exposure Exposure before risk mitigation measures and conversion factors Balance sheet exposure Off-balance sheet exposure Exposure after risk mitigation measures and conversion factors Balance sheet exposure Off-balance sheet exposure Exposure measured by risk RWA RWA density Central governments or central banks 509 379-509 379-1 838 0% Regional or local authorities 106 025 7 796 106 025 3 336-0% Public sector entities 76 716 8 442 135 226 1 914 24 184 18% Multilateral development banks 1 284 743 1 284 372-0% International organisations - - - - - - Institutions 100 165 1 361 100 165 681 42 261 42% Corporate 318 928 65 331 314 554 24 725 328 002 97% Retail 155 483 34 253 140 148 14 192 94 805 61% Secured by mortgages on real estate 372 673 45 995 341 156 21 040 226 549 63% Exposures in the event of failure to fulfil obligations 19 343-12 059-16 577 137% Associated with particular high risk 48 957-48 957-73 436 150% Covered bonds - - - - - - Institutions and companies subject to short-term credit risk assessment - - - - - - Collective investment entities 107-107 - 107 100% Equity securities 27 431-27 431-40 030 146% Others 50 118-50 118-21 052 42% In total 1 786 609 163 921 1 786 609 66 258-11/22
Exposures after application of credit risk mitigation procedures following each credit quality step Exposure Risk size Settlements from own funds In total among which unrated 0% 20% 35% 50% 75% 100% 150% Others Central governments or central banks 504 715 3 532 - - - 1 132 - - - 509 379 88 624 Regional or local authorities 109 361 - - - - - - - - 109 361 109 361 Public sector entities 88 481 483-48 176 - - - - - 137 140 131 305 Multilateral development banks 1 656 - - - - - - - - 1 656 1 656 International organisations - - - - - - - - - - - Institutions - 47 097-41 813-11 936 - - - 100 846 4 761 Corporate - 963-21 012-317 304 - - - 339 279 285 577 Retail - - - - 154 340 - - - - 154 340 154 340 Secured by mortgages on real estate - - 29 806 232 546-99 844 - - - 362 196 362 196 Exposures in the event of failure to fulfil obligations - - - - - 3 024 9 035 - - 12 059 12 059 Associated with particular high risk - - - - - - 48 957-48 957 48 957 Covered bonds - - - - - - - - - - - Institutions and companies subject to shortterm credit risk assessment - - - - - - - - - - - Collective investment entities - - - - - 107 - - - 107 107 Equity securities - - - - - 19 032-8 399-27 431 27 431 Others 29 066 - - - - 21 052 - - - 50 118 50 118 In total 733 279 52 075 29 806 343 546 154 340 473 430 57 992 8 399-1 852 867 1 276 490 Internal capital adequacy assessment process (ICAAP) Sound and comprehensive ICAAP is vital part of the strong risk management policy. The purpose of the Bank's ICAAP is to implement processes ensuring the calculation and accumulation of a capital base sufficient to cover the nature and level of the risks that arise or might arise from banking activities and to ensure business continuity. The ICCAP goal is to ensure an efficient mechanism functioning within the Bank to measure the internal capital requirement covering the following areas: 12/22
1) the functional and efficient Bank's management measures, including the Bank's clear organizational structure with well-defined, transparent and consistent lines of responsibility; 2) efficient processes of establishment, management and monitoring of risks faced by the Bank or which may be faced by the Bank as well as process of delivery of information on such risks; 3) appropriate internal control mechanisms including reliable management and accounting procedures; 4) stress testing which is an integral part of the Bank's ICAAP. The initial stages of the ICAAP include the risk identification and risk assessment and are realized through the Bank's self-assessment. This process the Bank identifies risks inherent in banking activities and evaluates them according to the selected assessment methods. During the Bank's self-assessment the Bank revises the factual structure of the risks assumed by the Bank and identifies levels of individual risk types. An impact of risk on the Bank's income and capital is assessed while determining the level of risk. Stress testing is an integral part of the ICCAP used to assess the internal capital requirement. The major goal of the stress testing is to establish if the Bank s capital is adequate to cover the likely loss which could be incurred from the deterioration of the Bank s financial status. In order to determine the capital requirement necessary for management of individual risk types as well as total risk incurred by the Bank, various scenarios of the stress testing are applied. In December 2016, the Board of the Bank of Lithuania, until the next supervisory inspection of the Bank and consideration of the assessment findings, established the size of additional capital requirement reaching 1.9 per cent of the total risk-weighted exposure amounts. Results of internal capital adequacy assessment are provided in the table below: Eur thousand ŠIAULIŲ BANKAS AB (according to the consolidated information). 30/06/2016) Own funds 153 827 Capital adequacy ratio 15.99% Internal capital premium to capital adequacy ratio 1.90% Risk Pillar 1 capital requirement Pillar 2 Additional capital requirement Eur thousand Percentage points Credit 66 633-0.00 Markets 1 598 390 0.00 Operational 8 737-0.00 Interest rate risk in the banking book - 2 800 0.29 Concentration - 15 437 1.60 TOTAL 76 968 18 627 1.90 Besides, the Bank is preparing a Recovery Plan which foresees all likely assumptions for recovery of financial stability of the Financial Group in emergency cases without additional states' aids as well as assurance of execution of critical and systematically important functions. 13/22
ANNEX 1 CAPITAL INSTRUMENTS' MAIN FEATURES TEMPLATE Information on main features if Common Equity Tier 1 1 Issuer Šiaulių Bankas AB 2 Unique identifier (e.g. CUSIP, ISIN or Bloomberg's identifier for non-public distribution) LT0000102253 3 Legislation treatment The Republic of Lithuania Regulatory treatment 4 Transitional CRR rules Common equity tier 1 capital 5 Post-transitional CRR rules Common equity tier 1 capital 6 Eligible at solo/(sub-)consolidated/ solo & (sub-)consolidated Consolidated Solo and consolidated 7 Instrument type (types to be specified by each jurisdiction) Ordinary registered shares 8 Amount recognized in regulatory capital (currency in million, as of most recent reporting date) EUR 109.471.65833 9 Nominal amount of instrument EUR 029 9 Issue price Various a 9 Redemption price b 1 Accounting classification Equity 0 1 Original date of issuance 1994 1 Perpetual or dated Perpetual 21 Original maturity date No maturity 3 1 Issuer call subject to prior supervisory approval No 1 Optional call date, contingent call dates and redemption amount 51 Subsequent call dates, if applicable 6 Coupons and/or dividends 1 Fixed or floating dividend/coupon Floating 7 1 Coupon rate and any related index 8 1 Existence of a dividend stopper No 9 2 Fully discretionary, partially discretionary or mandatory (in terms of timing) Partially discretionary 0 2 Fully discretionary, partially discretionary or mandatory (in terms of amount) Partially discretionary 0 2 Existence of step up or other incentive to redeem 1 2 Noncumulative or cumulative Noncumulative 2 Convertible or non-convertible Non-convertible 3 2 If convertible, conversion trigger(s) 4 2 If convertible, fully or partially 5 2 If convertible, conversion rate 6 2 If convertible, mandatory or optional conversion 7 2 If convertible, specify instrument type convertible into 8 2 If convertible, specify issuer of instrument it converts into 93 Write-down features No 0 3 If write-down, write-down trigger(s) 1 3 If write-down, full or partial 2 3 If write-down, permanent or temporary 3 If temporary write-down, description of write-up mechanism 4 3 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to 5 instrument) 3 Non-compliant transitioned features No 63 If yes, specify non-compliant features 7 (1) Putr if the issue is not applicable Information on key features of the Bank's received subordinate loan included into Tier 2 capital is disclosed in note 30 (pg. 104) to annual financial statements of Šiaulių Bankas AB 14/22
ANNEX 2 OWN FUNDS DISCLOSURE TEMPLATE Common Equity Tier 1 (CET1) capital: Instruments and reserves Amount at disclosure date, EUR thousands The Bank Financial Group group 1 Capital instruments and the related share premium accounts 109 472 109 472 109 472 of which: Instrument type 1 of which: Instrument type 2 of which: Instrument type 3 2 Retained earnings 16 604 20 105 21 155 3 Accumulated other comprehensive income (and other reserves) 922 943 943 3a Provisions for general banking risk 4 157 4 157 4 157 4 Amount of qualifying items referred to in Article 484 (3) and the related share premium accounts subject to phase out from CET1 5 Minority interests (amount allowed in consolidated CET1) 5a Independently verified interim profit minus any foreseeable taxes or dividends 27 176 25 724 24 811 6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 158 331 160 401 160 538 Common Equity Tier 1 (CET1) capital: regulatory adjustments 7 Additional value adjustments (negative amount) ( 52) ( 54) ( 67) 8 Intangible assets (net of related tax liability) (negative amount) (1 210) (1 375) (4 180) 9 Empty set in the EU 10 Deferred tax assets that rely on future profitability excluding those arising from ( 87) ( 87) temporary differences (net of related tax liability where the conditions in Article 38 (3) are met) (negative amount) 11 Fair value reserves related to gains or losses on cash flow hedges 12 Negative amounts resulting from the calculation of expected loss amounts (7 535) (7 024) (3 470) 13 Any increase in equity that results from securitized assets (negative amount) 14 Gains or losses on liabilities valued at fair value resulting from changes in own credit standing 15 Defined-benefit pension fund assets (negative amount) 16 Direct and indirect holdings by an institution of own CET1 instruments (negative amount) 17 Direct, indirect and synthetic holdings of the CET 1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 18 Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above 10 % threshold and net of eligible short positions) (negative amount) 19 Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount above 10 % threshold and net of eligible short positions) (negative amount) 20 Empty set in the EU 20a Exposure amount of the following items which qualify for a RW of 1250 %, where the institution opts for the deduction alternative 20b of which: qualifying holdings outside the financial sector (negative amount) 20c of which: securitization positions (negative amount) 20d of which: free deliveries (negative amount) 21 Deferred tax assets arising from temporary differences (amount above 1 0 % threshold, net of related tax liability where the conditions in Article 38 (3) are met) (negative amount) 22 Amount exceeding the 15 % threshold (negative amount) 15/22
23 of which: direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities 24 Empty set in the EU 25 of which: deferred tax assets arising from temporary differences 25a Losses for the current financial year (negative amount) 25b Foreseeable tax charges relating to CET1 items (negative amount) 27 Qualifying AT1 deductions that exceed the AT1 capital of the institution (negative amount) 28 Total regulatory adjustments to Common Equity Tier 1 (CET1) (8 797) (8 540) (7 804) 29 Common equity tier 1 capital (CET1) 149 534 151 861 152 734 Additional Tier 1 (AT1) capital: Instruments 30 Capital instruments and the related share premium accounts 31 of which: classified as equity under applicable accounting standards 32 of which: classified as liabilities under applicable accounting standards 33 Amount of qualifying items referred to in Article 484 (4) and the related share premium accounts subject to phase out from AT1 34 Qualifying Tier 1 capital included in consolidated AT1 capital (including minority interests not included in row 5) issued by subsidiaries and held by third parties 35 of which: instruments issued by subsidiaries subject to phase out 36 Additional Tier 1 (AT1) capital before regulatory adjustments Additional Tier 1 (AT1) capital: regulatory adjustments 37 Direct and indirect holdings by an institution of own AT1 instruments (negative amount) 38 Direct, indirect and synthetic holdings of the AT1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 39 Direct, indirect and synthetic holdings of the AT1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above 10 % threshold and net of eligible short positions) (negative amount) 40 Direct, indirect and synthetic holdings by the institution of the AT1 instruments of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) (negative amount) 41 Empty set in the EU 42 Qualifying T2 deductions that exceed the T2 capital of the institution (negative amount) 43 Total regulatory adjustments to Additional Tier 1 (AT1) capital 44 Additional Tier 1 (AT1) capital 45 Tier 1 capital (T1 = CET1 + AT1) 149 534 151 861 152 734 Tier 2 (T2) capital: Instruments and provisions 46 Capital instruments and the related share premium accounts 20 111 20 124 20 124 47 Amount of qualifying items referred to in Article 484 (5) and the related share premium accounts subject to phase out from T2 48 Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties 49 of which: instruments issued by subsidiaries subject to phase out 50 Credit risk adjustments 51 Tier 2 (T2) capital before regulatory adjustments 20 111 20 124 20 124 Tier 2 (T2) capital: regulatory adjustments 52 Direct and indirect holdings by an institution of own T2 instruments and subordinated loans (negative amount) 53 Holdings of the T2 instruments and subordinated loans of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 54 Direct and indirect holdings of the T2 instruments and subordinated loans of financial sector entities where the institution does not have a significant investment in those 16/22
entities (amount above 10 % threshold and net of eligible short positions) (negative amount) 55 Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) (negative amount) 56 Empty set in the EU 57 Total regulatory adjustments to Tier 2 (T2) capital 58 Tier 2 capital (T2) 20 111 20 124 20 124 59 Total capital (TC = T1 + T2) 169 645 171 985 172 858 60 Total risk weighted assets 1 004 647 1 000 018 1 014 879 Capital ratios and buffers 61 Common Equity Tier 1 (as a percentage of total risk exposure amount) 14.88% 15.19% 15.05% 62 Tier 1 (as a percentage of total risk exposure amount) 14.88% 15.19% 15.05% 63 Total capital (as a percentage of total risk exposure amount) 16.89% 17.20% 17.03% 64 Institution specific buffer requirement (CET1 requirement in accordance with article 9.40% 9.40% 9.40% 92 (1) (a) plus capital conservation and countercyclical buffer requirements, plus systemic risk buffer, plus systemically important institution buffer expressed as a percentage of risk exposure amount) 65 of which: capital conservation buffer requirement 2.50% 2.50% 2.50% 66 of which: countercyclical buffer requirement 67 of which: systemic risk buffer requirement 0.50% 0.50% 0.50% 67a of which: Global Systemically Important Institution (G-SII) or Other Systemically Important Institution (0-SII) buffer 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk exposure 5.48% 5.79% 5.65% amount) 69 [non relevant in EU regulation] 70 [non relevant in EU regulation] 71 [non relevant in EU regulation] Amounts below the thresholds for deduction (before risk weighting) 72 Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 73 Direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 74 Empty set in the EU 75 Deferred tax assets arising from temporary differences (amount below 1 0 % threshold, net of related tax liability where the conditions in Article 38 (3) are met) - 493 665 Applicable caps on the Inclusion of provisions In Tier 2 76 Credit risk adjustments included in T2 in respect of exposures subject to standardized approach (prior to the application of the cap) 77 Cap on inclusion of credit risk adjustments in T2 under standardized approach 872 393 860 131 839 425 78 Credit risk adjustments included in T2 in respect of exposures subject to internal ratings-based approach (prior to the application of the cap) 79 Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2014 and 1 Jan 2022) 80 Current cap on CET1 instruments subject to phase out arrangements 81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) 82 Current cap on AT1 instruments subject to phase out arrangements 83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) 84 Current cap on T2 instruments subject to phase out arrangements 85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) 17/22
ANNEX 3 CRR LEVERAGE RATIO DISCLOSURE TEMPLATE Reference date 31/12/2016 Entity name Bank Financial group Group Level of application Individual Consolidated Consolidated Table LRSum: Summary reconciliation of accounting assets and leverage ratio exposures Applicable Amount 1 Total assets as per published financial statements 1 823 639 1 832 296 1 861 278 2 Adjustment for entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation - - - 3 (Adjustment for fiduciary assets recognized on the balance sheet pursuant to the applicable accounting framework but excluded from the leverage ratio total exposure measure in accordance with Article 429(13) of Regulation (EU) No 575/2013) - - - 4 Adjustments for derivative financial instruments 728 728 728 5 Adjustment for securities financing transactions (SFTs) (974) (974) (974) 6 Adjustment for off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures) 163 921 141 050 139 841 EU-6a (Adjustment for intragroup exposures excluded from the leverage ratio total exposure measure in accordance with Article 429(7) of Regulation (EU) No 575/2013) - - - EU-6b (Adjustment for exposures excluded from the leverage ratio total exposure measure in accordance with Article 429(14) of Regulation (EU) No 575/2013) - - - 7 Other adjustments (1 210) (1 462) (4 267) 8 Leverage ratio total exposure measure 1 986 104 1 971 638 1 996 606 Table LRCom: Leverage ratio common disclosure On-balance sheet exposures (excluding derivatives and SFTs) CRR leverage ratio exposures 1 On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral) 1 813 922 1 822 283 1 851 265 2 (Asset amounts deducted in determining Tier 1 capital) (1 210) (1 462) (4 267) 3 Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets) (sum of lines 1 and 2) 1 812 712 1 820 821 1 846 998 Derivative exposures 4 Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin) 3 280 3 280 3 280 5 Add-on amounts for PFE associated with all derivatives transactions (mark- to-market method) 728 728 728 EU-5a Exposure determined under Original Exposure Method - - - 6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the applicable accounting framework - - - 7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) - - - 8 (Exempted CCP leg of client-cleared trade exposures) - - - 9 Adjusted effective notional amount of written credit derivatives - - - 10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) - - - 11 Total derivatives exposures (sum of lines 4 to 10) 4 008 4 008 4 008 18/22
SFT exposures 12 Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions 1 030 1 030 1 030 13 (Netted amounts of cash payables and cash receivables of gross SFT assets) (974) (974) (974) 14 Counterparty credit risk exposure for SFT assets - - - EU-14a Derogation for SFTs: Counterparty credit risk exposure in accordance with Articles 429b(4) and 222 of Regulation (EU) No 575/2013 - - - 15 Agent transaction exposures - - - EU-15a (Exempted CCP leg of client-cleared SFT exposure) - - - 16 Total securities financing transaction exposures (sum of lines 12 to 15a) 56 56 56 Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amount 163 921 141 050 139 841 18 (Adjustments for conversion to credit equivalent amounts) (118 699) (100 462) (99 501) 19 Other off-balance sheet exposures (sum of lines 17 and 18) 45 222 40 588 40 340 Exempted exposures in accordance with Article 429(7) and (14) of Regulation (EU) No 575/2013 (on and off balance sheet) EU-19a (Intragroup exposures (solo basis) exempted in accordance with Article 429(7) of Regulation (EU) No 575/2013 (on and off balance sheet)) - - - EU-19b (Exposures exempted in accordance with Article 429 (14) of Regulation (EU) No 575/2013 (on and off balance sheet)) - - - Capital and total exposure measure 20 Tier 1 capital 149 534 151 861 152 734 21 Leverage ratio total exposure measure (sum of lines 3, 11, 16, 19, EU-19a and EU-19b) 1 861 999 1 865 474 1 891 402 Leverage ratio 20 Leverage ratio 8.03% 8.14% 8.08% EU-23 EU-24 Choice on transitional arrangements and amount of derecognised fiduciary items Choice on transitional arrangements for the definition of the capital measure Transitional Transitional Transitional Amount of derecognised fiduciary items in accordance with Article 429(11) of Regulation (EU) No 575/2013 - - - Table LRSpl: Split-up of on balance sheet exposures (excluding derivatives, SFTs and exempted exposures) CRR leverage ratio exposures EU-1 Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures), of which: 1 812 712 1 820 821 1 846 998 EU-2 Trading book exposures 26 103 26 103 57 427 EU-3 Banking book exposures, of which: 1 786 609 1 794 718 1 789 571 EU-4 Covered bonds - - - EU-5 Exposures treated as sovereigns 693 404 693 680 693 680 EU-6 Exposures to regional governments, MDB, international organisations and PSE not treated as sovereigns - - - EU-7 Institutions 100 165 102 864 103 880 EU-8 Secured by mortgages of immovable properties 421 630 421 630 416 468 EU-9 Retail exposures 155 483 212 326 212 326 EU-10 Corporates 318 928 256 830 239 439 EU-11 Exposures in default 19 343 25 410 26 256 EU-12 Other exposures (e.g. equity, securitisations, and other non-credit obligation assets) 77 656 81 978 97 522 19/22
CRR Leverage Ratio Disclosure Template Table LRQua: Free format text boxes for disclosure on qualitative items Column Free format Row 1 Description of the processes used to manage the risk of excessive leverage 2 Description of the factors that had an impact on the leverage Ratio during the period to which the disclosed leverage Ratio refers In 2016, the Bank worked to improve leverage risk management system which includes risk assessment procedures and provides processes which are intended for responding to changes in the leverage ratio. The Bank's leverage ratio grew by 1.13 p.p. in 2016 The change in ratio was affected by increased Tier 1 capital (EUR 33.1 million) and leverage ratio total exposure measure (EUR 168.4 million). 20/22
ANNEX 4 DISCLOSURE ON ASSET ENCUMBRANCE Bank 31.12.2016 Template A Assets Carrying amount of encumbered assets Fair value of encumbered assets Carrying amount of unencumbered assets Fair value of unencumbered assets 010 040 060 090 010 Assets of the reporting institution 27.509 1,796,130 030 Equity instruments 0 0 1.318 1.318 040 Debt securities 21.068 21.749 545.275 569.651 120 Other assets 0 82.193 Template B Collateral received Fair value of encumbered collateral received or own debt securities issued Fair value of collateral received or own debt securities issued available for encumbrance 010 040 130 Collateral received by the reporting institution 0 0 150 Equity instruments 0 0 160 Debt securities 0 0 230 Other collateral received 0 0 240 Own debt securities issued other than own covered bonds or ABSs 0 0 Template C Encumbered assets/collateral received and associated liabilities Matching liabilities, contingent liabilities or securities lent Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered 010 030 010 Carrying amount of selected financial liabilities 1.734 29.747 21/22
D - Information on importance of encumbrance Encumbrance is not important to Šiaulių Bankas because its volumes are relatively low. Financial group, 31/12/2016. Template A Assets Carrying amount of encumbered assets Fair value of encumbered assets Carrying amount of unencumbered assets Fair value of unencumbered assets 010 040 060 090 010 Assets of the reporting institution 27.509 1,804,787 030 Equity instruments 0 0 2.377 2.377 040 Debt securities 21.068 21.749 545.678 569.651 120 Other assets 0 85.965 Template B Collateral received Fair value of collateral Fair value of encumbered received or own debt collateral received or own securities issued available debt securities issued for encumbrance 010 040 130 Collateral received by the reporting institution 0 0 150 Equity instruments 0 0 160 Debt securities 0 0 230 Other collateral received 0 0 240 Own debt securities issued other than own covered bonds or ABSs 0 0 Template C Encumbered assets/collateral received and associated liabilities Matching liabilities, contingent liabilities or securities lent Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered 010 030 010 Carrying amount of selected financial liabilities 1.734 29.747 D - Information on importance of encumbrance Encumbrance is not important to Financial group of Šiaulių Bankas because its volumes are relatively low. 22/22